Nova workboard

a blog from young economists at Nova SBE

The Fallacy of Cowpitalism

It is estimated that today there are around 280 million cows in all of India with almost every second household owning at least one cow.

This raises the question why so many Indian households own cows. Santosh Anagol, Alvin Etang and Dean Karlan, economists from Yale and Pennsylvania University took a closer look at this conundrum and, since they are economists, especially at the profitability of owning a cow.

For their analysis they set up an estimation in which they included cost factors such as fodder cost, depreciation of cattle, vet expenditures, the cost of insemination and of course labor cost. They then added them up against the potential outputs cows can give: Milk, offspring, dung cakes (they do make profit out of those) and the value of selling an adult animal.

Surprisingly, their estimates showed that owning a cow has a negative average return on investment of 34%. They did the same analysis for bulls and got an even higher negative average return of investment, namely 69%.

So why do so many Indians hold cows and bulls, even though this seems to go against everything we learned in our economics courses, i.e .the principles of profit maximization?

The first explanation the authors came up with – apart from measurement errors – is a rather obvious one: In India cows are seen as holy animals, therefore one can assume that people buy them for religious reasons. They quickly dismissed this reasoning as the analysis for bulls, which are non-holy animals, gave the same negative result.

The second explanation is that Indians could possibly prefer home-produced milk over milk bought in stores. And indeed, tests conducted in 2012 showed that Indian milk “was adulterated with skimmed milk powder and glucose, or more shockingly hydrogen peroxide, urea and detergent”.
Additionally, the survey conducted by the authors found that only 12% of the sampled households sold their milk, hinting to the fact that they do consume most of the produced milk by themselves.
Still, the roughly 6 liters of milk produced by a cow per day is more than most families need, so this could explain the phenomenon only to some extent.

The more surprising explanation the authors gave is related to what behavioral economists call myopia: People tend to choose a small reward today over a bigger reward in the future, or differently put: When I keep my money under my mattress I am more likely to spend it than if I am able to store it in a way that makes it slightly less available to me.
So to protect their money from themselves, people in developed parts of the world use bank accounts to overcome this problem. However, especially in the more rural parts of India getting a bank account is not as easy as it is at NOVA.

According to the theory the authors provide, to overcome the lack in availability of bank accounts, people in rural India buy cows as means of saving money, even though they seem to lose quite some money by doing so.

The authors stress that this is nothing but a hypothesis, but if there is any truth in there, draw backs in the field of development economics can be made:

First, development aid is often done by giving grants to pay for livestock. Given these findings, these grants may actually be detrimental for aid recipients as it puts them into a position where they are bound to lose money.

Second, according to Dean Karlan, improving access to bank accounts could have a much bigger impact in getting people out of poverty than any of the conventional forms of aid: By being able to save and later recollect your accumulated money without loss (and maybe even with interest), investments such as tuition fees become much more feasible.

Amery Gülker 761

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Author: studentnovasbe

Master student in Nova Sbe

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